Holding Real Estate Assets Forever: An Investor’s Look at Benefits & Costs

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I used to think once you own a piece of real estate, you should hold it forever. As many of you know, real estate offers quite a few benefits, including cash flow, appreciation opportunities, tax deductions, inflationary hedge and so on. However, when I start thinking more about real estate in the long run, I have to start thinking about weighing the benefits and costs of real estate a bit differently. Let’s take a look at some of these factors.

Benefits

Cash Flow

Cash flow is the holy grail of the real estate investment. If you have a cash flow positive property in your portfolio, you are doing awesome and all is well. On the other hand, cash flow returns aren’t fantastic. I mean, some of you may be situated in great markets and you are achieving that 2% rule, but in general, in most markets you are not looking to get above a 10% return in your rentals. In my particular market, you can maybe get a 5-6% return. So even if you’ve got cash flow, unless you’ve got a lot of it, it is hard to call it a day. Your capital is working hard, but is it achieving its best return?

Related: The Buy ‘n Hold and NEVER Sell Strategy: A Case Study

Possible Appreciation

Appreciation is a tough game. Even though we have had a fantastic rebound from 2011 to now, we rarely see opportunities like that. At best we can think about 3-5% appreciation if we are lucky and situated in a good city. After all, in Las Vegas, for example, I’ve seen homes during 2011 to 2012 selling for the same prices as they had sold for in the 1990s. So if you kept your real estate all this time, you better have a strong stomach to endure the horrors of the housing crash. You also need to have a strong stomach to not be tempted to sell during the highs of the 2006 market.

Tax Deductions

Mortgage interest costs are tax deductible. You can also depreciate your house for 27.5 years. Both of these factors create fantastic tax benefits during your ownership. However, once you’ve finished paying off your loan and you’ve fully depreciated your asset, your taxes are likely to go up. Not the end of the world, I guess, since you’ll be fantastically happy that you’ve paid off your mortgage anyway.

Inflationary Hedge

Seeing how the Vegas market played out during the past decade, we can’t really say houses can be an inflationary hedge, as they can be susceptible to major price fluctuations. Nevertheless, it is a piece of asset that you’ll have, and people always need shelter.

Costs

Capital Improvements

Holding real estate for too long, however, has its costs too. The longer you own a property, the likelier you’ll be faced with major capital improvements that can take a chunk out of your wallet at one time. Say the roof starts leaking, the AC goes down, the last tenant leaves the laminate flooring in tatters, etc. Houses have age too. As Ben Leybovich has written in great detail about depreciation and capital improvements here, you will always have to have a significant cash reserve when your property breaks down.

Related: The Secret to Buy & Hold: How to Squash Vacancies by Understanding Demand

Economic Changes in the City

I don’t mean to bash on Detroit, but cities are very dynamic. Over the course of US history, many cities that have once played a major metropolis have now become a shadows of themselves. Some towns have become ghost towns. Towns may get rich through an oil boom, but then experience an oil bust. There are numerous factors that you can’t control once you decide to set your roots down. If in the city you own, the piece of real estate starts declining, do you stick to your guns or do you want to find something else? How about the next opportunity? Who wouldn’t want to buy in Shanghai before it became THE Shanghai?

The point of this article is simply to make you think about whether it is worth it to hold your property forever. Personally, I am still at a stage where I am willing to take more risks, and I am still seeking out other opportunities. So keeping all my assets in real estate doesn’t sound so attractive to me anymore. What about you?

How do you approach your real estate investing: Do you plan on holding your assets indefinitely? What would you add to my pros and cons list?

Leave a comment, and let’s talk!

About Author

Leon Yang

Leon Yang is an active real estate investor in Las Vegas. He is a buy and hold guy who also likes to flip from time to time. His main passion is to traveling to the less traveled places and inspiring others to become financially independent through real estate.

11 Comments

  1. Dawn Anastasi

    As far as capital improvements, you’re always going to have them. Everything doesn’t wear out at the same time, and you also need to keep “in with the times” with the way a property looks, even a rental. If you go with things that are “timeless” you can be better off, but who knows what style will be “in” when the year 2025 rolls around?

  2. kris patel

    Love to hold for ever at age 73, as long as positive cash flow. After me heirs will get it at stepped up basis, hope!!! Have 25 yrs fix rate till paid off in 2035. Tenant keeps up with capital cost on NNN property. So great deal.

  3. Scott Trench

    Leon – Thanks for this article.

    One of the most important things for investors to consider is their return on equity. In most Real Estate Positions, investors are fairly heavily leveraged (20% down on a property is 80% loan). With high leverage comes high returns, on average for real estate as an asset class. The longer you hold onto Real Estate, the less leveraged you become as you pay down principal on the loan.

    It is my understanding that Real Estate, on average, tends to provide the highest incremental return over other types of investments in the first 5-7 years of the investment, and that as you deleverage by paying down principal, your outsize returns diminish.

    For me, the question isn’t “how long should I hold on to that house?”, it’s “how long should I wait before I refinance and deploy my equity position in more assets?”

    I’d love to hear others thoughts on this concept!

  4. Leon I have nearly 4 dozen properties that I bought cash for under 30k each……all are single wide and double wide mobile homes on private lots here in Texas. ….all have been rented for between 450 and 550 a month. repairs are almost non existent- due to the fact the first 100 .00 of repairs is the tenants deductible for reduced rent prices. that’s an average of a 20% annual return and even deducting the property taxes ( 7-800 total per unit per year) long term is the only way to go…..my tenants now average 8.2 years in each one. occasionally you get a lemon….but sometimes you get a diamond…last week we closed on a 15,000 cash deal , rented 2 days later at 500 a month- no repair issues, we let the tenant who is a carpenter paint the entire place and clean the carpets in lieu of a deposit……its really a fun business and me being a Police Officer assists me in ensuring I get good tenants that meet the superstar tenant 5 = (1). no smokers, (2). no pets, (3). 1 child , (4). 2 incomes , (5). 2 years on the job….. I always visit my tenants at where they are now to see if they have cleanliness issues, and to get a feel before we go into contract.

  5. Good points to think about here, Leon!

    It’s definitely not always a black or white issue. Sometimes there are grey areas. I completely agree about market changes. Apart from the market, situations change as well as perspectives due to experience. What we believe today may not be the same as what we believe tomorrow. Life happens and with that comes change whether it be good or bad.

    Just some food for thought. Thanks for sharing!

  6. Jesse T.

    One strong argument for the buy and hold forever strategy is the high transaction costs for real estate. However it isn’t really that simple.

    One thing that happens is people’s goals change. When a lot of people are starting out getting cash flow and a possibility of appreciation are the main goals. I think 5 years is a decision point, since between principal reduction and appreciation there likely is significant equity to redeploy if desired.

    What many people do with investments is have a tendency to sell the winners and keep losers with the thought that they will come back at some point. This is less than optimal for stocks and might be even worse for real estate. While the return on equity will be lower on the winners, the potential for increased appreciation will be there and the hassle factor will likely be lower. One thing that you have with a significantly appreciated property is “a moat” vs. new investors who would have to finance 60 to 75% of the current value.

    Of course if the goal is to manage properties and live off the rents, then selling the whole portfolio and investing in commercial or multifamily may be the way to go.

    If you want to go from managing a portfolio to more passive, you may have to sell to accomplish that goal.

  7. Jeff S.

    So Leon, you kind of left us hanging. When you say keeping all your assets in RE isn’t that attractive what are you saying?

    I know better than trying to time the market. I look at owning RE as kind of like fishing. You have to have the hook in the water to catch fish out of the next school of fish that comes by. If you have RE over a long-time period you will enjoy those hot market run-ups. If you sell you will probably miss the best part.

    Although, Sam Zell, one honkin big time investor sold everything before the crash and is now back in.

  8. Real Estate lends itself to many different approaches such as buy and hold, flipping, trading up via 1031. Different styles suit different people. There are many ways to prosper in the real estate sector in my opinion.

  9. Edward Synicky

    There are as many ways to make money in real estate as there are innovative investors. No one commented on Sgt Dave’s model. Double wides, how so back country of him. Not a lot or any appreciation maybe not a lot of ownership pride but stop and think about the cash flow, it is incredible. You can spend the cash flow you can’t spend the appreciation. Go Dave! For me I like to keep it simple. I’ve had multi units and commercial. I now own nothing but SFR, free and clear in a dozen states. Nothing in the economy affects the way I live. If properties values drop 30-40% my rents MAY drop 10%, I could care. I love when the market tanks. All of the investors that leveraged their investments in Phoenix provided me and many others a golden opportunity. I picked up ten homes in Phoenix in 2010-2011 for pennies on the dollar. Think the market won’t collapse again, read your history my friends, it always happens. Repairs, major capital improvements, bring then on, I have the cash flow to pay for any contingency and I like providing a decent and safe place for my residents. And yes I am a buy and hold investor, very boring. I do 1031’s when it is time to move on , I have never done a 1031 where my cash flow has not gone up appreciably. As to everyone out there that is obsessed with ROI, it only matters when you start out investing to build your base, but be cautious, you will soon realize that a dollar earned is better than a dollar of interest paid. I love paying taxes, it shows I am earning a lot of money. My way is not the only way and may not even be the best way, but I can tell you it has worked marvelously for me and my family. But my ROI would please few “investors”.

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